Tax breaks:the rising cost

The Federal Treasury loves to talk about “tax expenditures.”

Most people call them tax breaks. And they are legitimate.

But the Treasury hates them. That’s because protecting Federal revenue is a big part of its job.

So we shouldn’t be too surprised to see that the Treasury has just produced figures showing that the cost of these “expenditures” – or tax breaks – is rising sharply.

A tax expenditure is money the Federal government doesn’t get because it allows tax breaks on certain items, like superannuation and accelerated depreciation on business equipment.

But superannuation is the really big ticket item in a report that the Treasury has just published. Its study shows that the government will “spend” almost $26.9 billion, on superannuation tax breaks this financial year.

So, theoretically at least, the government would get an extra $26.9 billion this financial year, if super was taxed at standard rates.

That’s almost twice what tax breaks on super cost, back in 2003-04.

That calculation makes no allowance for inflation.

However, even the Treasury, itself, urges us to take care with these figures. And they are, frankly, controversial. Indeed one MP we talk to calls them “nonsense.”

The Treasury does admit that its figures are not really a suitable base, for comparisons over time.

However it does publish such comparisons and its figures are the best available.

The Treasury also admits that Australians would probably not save for their retirement, as they do now, if the tax breaks on super were scrapped. That’s putting it mildly.

The Treasury report says the total cost of all tax breaks, this financial year, will be $51.4 billion.

That is a massive 4.6 per cent of Australia’s gross domestic product.

That is up from just 3.7 per cent in 2003-04. And this comparison does take inflation into account, at least indirectly.
Naturally, the Treasurer, Wayne Swan, would abolish all tax breaks overnight, if he could do so – and survive.

But he knows that is not a realistic idea.

Besides, even from the government’s point of view, tax breaks, or expenditures, are not necessarily bad.

If the superannuation tax breaks, for example, were abolished millions of Australians, who do save for their retirement that way, would, almost certainly, stop doing so.

So the government would face much bigger pension bills in future.

Besides, many people believe that the tax breaks the government does offer on retirement savings are not all that generous, anyway.

“They tax (retirement savings) on the way in (to the super fund), tax earnings on that money while its there, and then tax it again, on the way out,” many say.

That common complaint does have some merit.

So, though, does counting the cost of tax breaks. And if the Treasury didn’t do that, each year, who would?